Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control

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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures. Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions. Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

Personal Finance, Part 13 — Unemployment Risk

In some ways the biggest risk that we face is unemployment risk, because the biggest asset that most people have is the stream of wages that they will earn from their jobs.

Twenty years ago, as a young actuary who had just gotten his ASA, I made a promise to myself that I would build up my investment knowledge base, and spend one hour a day improving my skills. Why did I decide to do this? I realized that few actuaries were good with investments (then, on this side of the Atlantic), and that most of the risks that life insurance companies faced were driven by assets, not liabilities (still true for now). That was different than what the actuarial syllabus would lead one to believe, but nonetheless true. I only know of one life company that failed from bad liability pricing (calculation of premiums). All the rest died from bad asset strategies.

That “one hour a day” (six days a week) made me invaluable to many of the companies that I served, and opened a lot of employment doors for me. It also allowed me to make a jump out of the insurance world, at least for now. In a knowledge based economy, continually improving your skills is a great way to advance your career, and limit downside when the inevitable bumps happen due to M&A, etc.

Now, to the average person entering the work force, it pays to look at the underlying economics of the industry to see how stable employment prospects will be. No one is perfect in making these judgments, but there are often industries to avoid. Examples: certain traditional media companies are being destroyed by the internet. During the tech bubble, it was cool to work for tech companies, but how much future is there if they don’t make any money. Wall Street is wonderful, but periodic layoffs can knock out a lot of people on the margins of the business.

Also, understanding the underlying economics of your industry instantly makes you more valuable to your employer, since many only understand the technical craft that they pursue.

Finally, cultivate friends. Be competent, but be warm. Help others in need when they are looking for work. Be willing to lend a sympathetic ear to colleagues in their job troubles. Network at industry functions. Start a blog to demonstrate expertise. (Okay, nix that one. 😉 ) Treat vendors with kindness and respect; learn their business if you can. Join industry task forces to solve larger problems.

We can’t control our employment futures in entire, but we can influence how well we bounce when things don’t go right. To repeat, three ways to mitigate unemployment risk:

Continually improve your skills

Understand your industry

Build a network of friends in your industry

About David Merkel

David J. Merkel, CFA, FSA, is a leading commentator at the excellent investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited David to write for the site, and write he does — on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, and more. His specialty is looking at the interlinkages in the markets in order to understand individual markets better.
David is also presently a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. He also manages the internal profit sharing and charitable endowment monies of the firm.
Prior to joining Hovde in 2003, Merkel managed corporate bonds for Dwight Asset Management. In 1998, he joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.
His background as a life actuary has given David a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that David will deal with in this blog.
Merkel holds bachelor’s and master’s degrees from Johns Hopkins University. In his spare time, he takes care of his eight children with his wonderful wife Ruth. View all posts by David Merkel →